IMF pledges backing for measures to ease prices

Central Bank  governor Njuguna Ndung’u says the Treasury would launch negotiations with IMF to have the credit facility expanded. Photo/FILE
Central Bank governor Njuguna Ndung’u says the Treasury would launch negotiations with IMF to have the credit facility expanded. Photo/FILE 

The International Monetary Fund has pledged to prop up measures aimed at stabilising the shilling and curb inflation that were announced by the Central Bank last week.

The fund’s resident representative in Nairobi, Mr Ragnar Gudmudsson, said the gradual tightening of monetary policy represented by raising the Central Bank Rate (CBR) from 6.25 per cent to seven per cent would help control inflation.

Amount of support

“We stand ready to support whenever necessary,” said Mr Gudmundsson in a statement. However, he did not disclose the amount of support and the timeframes.

President Kibaki has asked the IMF to speed up the balance of $314 million under the extended credit facility of $509 million negotiated last year to shore up the shilling. The first disbursement was made in January.

Central Bank governor Njuguna Ndung’u said last week that the Treasury would also launch negotiations with IMF to have the facility expanded.

“The latest MPC statement goes in the right direction on the overriding objective of bringing down inflation to sustainable levels,” he said.

MPC member Terry Ryan said the IMF had already indicated willingness to review the facility in view of changed circumstances with the escalation of commodity prices, political turmoil in the Arab world and the European debt crisis.

“Chances are the IMF will augment what remains of the programme. The Fund is aware that things are more difficult this year than they were at the time of the negotiations,” said Prof Ryan.

The IMF support of the credit squeeze is in line with its unease over the sharp increase in inflation from 4.5 per cent in January to Sh16.67 per cent last month, driven by increased domestic demand.

The core inflation, now at seven per cent, has also surged above the long-term target of five per cent, reflecting failure by recent Central Bank action to control credit expansion.

According to CBK data, credit expanded by Sh154.4 billion in the first six months of the year compared to Sh63 billion over the corresponding period in 2010 despite expectations of a slower economic growth rate of 5.3 per cent this year compared to 5.6 per cent in 2010.

In the second quarter of this year, when inflation also accelerated, credit also expanded by Sh88.4 billion compared to Sh66 billion in the first quarter, forcing the IMF to stress that economic managers do more to tame prices.

Prof Ndung’u has since March resisted calls to tighten money supply, arguing that inflation was caused by supply shocks rather than increased demand.

Productive activities

“Most of the credit has gone to productive activities such as manufacturing. Banks could reduce loans to private households and continue to lend more to the sectors that will help the economy grow,” said Prof Ryan.

The latest policy moves tie CBR changes to availability of cash and loans in the economy, excluding net foreign cash, technically called net domestic assets (NDA).

The NDA effectively limits the amount of credit for both the government and the private sector. “If NDA is above target, the policy rate will be raised and vice versa,” the MPC statement said.

Analysts said the increase in CBR was below their expectations.

“The move to raise the CBR by 75 basis points is not going to have much of the intended impact immediately. We needed to see the Central Bank come out more strongly,” said Mr Peter Wachira, a senior investment manager at fund manager PineBridge.

Mr Wachira said the market was more focused on the 91-day Treasury bill rates — and not the CBR — because the former was more actively used and monitored.

However, he said, the CBR would influence foreign investment and dollar inflows to strengthen the shilling but inflation would dampen the outlook.

“Investors will be asking how long they would be seeing this high level of inflation because it has impact on the value of their assets,” said Mr Wachira.

And Mr Steve Ogada, head of research at Dyer and Blair Investment Bank said: “Without price stability, Treasury bill rates will remain high as investors bid higher to cover erosion of value”.

He added that structural reforms were needed to support monetary policy in tackling inflation. “Unless you deal with structural issues such as reliable food supply and distribution as well strategic oil reserves, then tackling inflation is going to remain a challenge for the central bank.”